KEY POINTS:
Sending money back home is a way of life for many Pacific Islanders in New Zealand. The money they earn here helps families back home in the islands in many ways.
Yet until now, the cost of sending that money has been the highest in the world - close to 10 times the cost of remitting money elsewhere in the world.
Renewed competition to benefit financial consumers was a driving force behind the World Bank efforts to raise awareness and find solutions to the high costs of transfer in the region.
Working with the Reserve Bank of New Zealand, the Ministry of Pacific Island Affairs, Westpac, Visa International and other parties, a significant milestone has been created.
Its economic and social impact should not be underestimated.
Westpac NZ recently launched a new prepaid card for New Zealand's Pacific community. Costs for the new Westpac Express Visa Card range from 3 to 5 per cent, a big cut from the current 15 to 25 per cent.
The move will put millions back in the pockets of the region's poorest citizens. It could inject as much as $140 million per year into Pacific Island economies. The Pacific market has been traditionally dominated by one or two large money transfer players. Limited competition has burdened Islanders with steep transfer costs.
Sending money from New Zealand to the Pacific was regarded as one of the highest remittance cost corridors in the world. Remittances fees were estimated to take $25 out of every $100 sent to the Islands. Income earned here supports thousands of families across the Pacific and is integral in the fight against poverty in the region.
In the Pacific, remittances account for anywhere between 30 to 50 per cent of the Gross Domestic Product for many nations and is the number one export earner, contributing to economic growth. In Tonga, such remittances account for 32 per cent of GDP and across Polynesia 22.5 per cent of GDP.
World Bank focus group sessions found that Islanders used these critical funds to pay for school, housing and health care.
With family members in New Zealand already making sacrifices to send small amounts of money home on a regular basis, the savings generated by this card will have a significant impact.
Hopefully, the entry of a new player will put pressure on other competitors in the market to drive fees down further.
The catalyst that mobilised Westpac NZ was the New Zealand Parliament's recent modification to the Financial Transactions Reporting Act. Parliamentarians relaxed regulations around Know Your Customer (KYC) provisions.
Regulators in New Zealand have paved the way for other countries by adopting a risk-based approach to financial reporting, as opposed to the strictly rules-based approach a number of countries adopted after the 9/11 attack in the United States.
Costs remain well above the international best practice standard of 5 per cent or less. With today's technology, money transfer operators and financial institutions cannot justify unnecessarily high transaction fees.
The next challenge is to promote acceptance of these new products as a better and cheaper means of sending money, which means improving financial capability.
This will include promoting use of ATM machines and Eftpos, as well as offering targeted programmes to assist Pacific nations gain access to, and understanding of, other financial products and services.
Westpac leads the way, but it is anticipated that other New Zealand financial institutions will follow suit and make the necessary adjustments to reduce transaction costs.
The strong partnerships formed, and the passions of the people involved, helped drive this project to fruition in a short space of time.
New Zealand is leading the way for the Pacific, and the next step for the World Bank is to import a similar solution for Pacific Islanders living in Australia.
* Dr Manjula Luthria is senior economist, Pacific Region, for the World Bank.
